Corporate governance

INTRODUCTION: Corporate governance still remains an ambiguous and misunderstood phrase, three aspects are becoming evident. First, there is no unique structure of corporate governance in the developed world; nor is one particular type unambiguously better than others. Thus, one cannot design a code of corporate governance for Indian companies by mechanically importing one form or another. Second, Indian companies, banks and financial institutions (FIs) can no longer afford to ignore better corporate practices. As India gets integrated in the world market, Indian as well as international investors will demand greater disclosure, more transparent explanation for major decisions and better shareholder value. Third, corporate governance goes far beyond company law. The quantity, quality and frequency of financial and managerial disclosure, the extent to which the board of directors exercise their fiduciary responsibilities towards shareholders, the quality of information that management share with their boards, and the commitment to run transparent companies that maximise long term shareholder value cannot be legislated at any level of detail. Instead, these evolve due to the catalytic role played by the more progressive elements within the corporate sector and, thus, enhance corporate transparency and responsibility A Minimal Definition: Corporate governance deals with laws, procedures, practices and implicit rules that determine a companys ability to take managerial decisions vis--vis its claimantsin particular, its shareholders, creditors, customers, the State and employees. There is a global consensus about the objective of good corporate governance: maximising long term shareholder value. Since shareholders are residual claimants, this objective follows from a premise that, in well performing capital and financial markets, whatever maximises shareholder value must necessarily maximise corporate prosperity, and best satisfy the claims of creditors, employees, shareholders, and the State. For a corporate governance code to have real meaning, it must first focus on listed companies.

These are financed largely by public money (be it equity or debt) and, hence, need to follow codes and policies that make them more accountable and value oriented to their investing public. There is a diversity of opinion regarding beneficiaries of corporate governance. The Anglo-American system tends to focus on shareholders and various classes of creditors. Continental Europe, Japan and South Korea believe that companies should also discharge their obligations towards employees, local communities, suppliers, ancillary units, and so on. In the first instance, it is useful to limit the claimants to shareholders and various types of creditors. There are two reasons for this preference. 1. The corpus of Indian labour laws are strong enough to protect the interest of workers in the organised sector, and employees as well as trade unions are well aware of their legal rights. In contrast, there is very little in terms of the implementation of law and of corporate practices that protects the rights of creditors and shareholders 2. There is much to recommend in law, procedures and practices to make companies more attuned to the needs of properly servicing debt and equity. If most companies in India appreciate them importance of creditors and shareholders, then we will have come a long way. Irrespective of differences between various forms of corporate governance, all recognise that good corporate practices mustat the very least satisfy two sets of claimants: creditors and shareholders. In the developed world, company managers must perform to satisfy creditors dues because of the disciplining device of debt, which carries with it the credible threat of management change via bankruptcy. Analogously, managers have to look after the right of shareholders to dividends and capital gains because if they do not do so over time, they face the real risk of take-over. An economic and legal environment that puts a brake on the threat of bankruptcy and prevents takeovers is a recipe for systematic corporate mis-governance. Board of Directors The key to good corporate governance is a well functioning, informed board of directors. The board should have a core group of excellent, professionally acclaimed non-executive directors who understand their dual role: of appreciating the issues put forward by management, and of honestly discharging their fiduciary responsibilities towards the companys shareholders as well as creditors.

Recommendation 1 There is no need to adopt the German system of two-tier boards to ensure desirable corporate governance. A single board, if it performs well, can maximise long term shareholder value just as well as a two- or multi-tiered board. Equally, there is nothing to suggest that a two-tier board, per sec, is the panacea to all corporate problems. However, the full board should meet a minimum of six times a year, preferably at an interval of two months, and each meeting should have agenda items that require at least half a days discussion. It has been proved time and again in the USA, Great Britain, Germany and many other OECD countries that the quality of the boardand, hence, corporate governanceimproves with the induction of outside professionals as non-executive directors. As a recent article put it: Obviously not all well governed companies do well in the market place. Nor do the badly governed ones always sink. But even the best performer risk stumbling some day if they lack strong and independent boards of directors. Recommendation 2 Any listed companies with a turnover of Rs.100 crores and above should have professionally competent, independent, non-executive directors, who should constitute at least 30 percent of the board if the Chairman of the company is a non-executive director, or at least 50 percent of the board if the Chairman and Managing Director is the same person. Getting the right type of professionals on the board is only one way of ensuring diligence. It has to be buttressed by the concept of limitation: one cannot hold non-executive directorships in a plethora of companies, and yet be expected to discharge ones mobligations and duties. This yields the third recommendation. Recommendation 3 No single person should hold directorships in more than 10 listed companies. As of now, section 275 of the Companies Act allows a person to hold up to 20 directorships. The Report of the Working Group on the Companies Act (February 1997) has kept the number unchanged. It is felt that with 20 directorships it would be extremely difficult for an individual to make an effective contribution and ensure good governance, and yet discharge his fiduciary responsibilities towards all. In this context, it is useful to give the trend in the USA. According to a

recent survey of over 1,000 directors and chairmen of US corporations, the directors themselves felt that no one should serve on more than an average of 2.6 Boards. On 12 November 1996, a special panel of 30 corporate governance experts co-opted by the National Association of Corporate Directors of the USA recommended that Senior executives should sit on no more than 3 boards, including their own. Retired executives and professional non-executive directors should serve on no more than 6. Recommendation 4 For non-executive directors to play a material role in corporate decision making and maximising long term shareholder value, they need to become active participants in boards, not passive advisors; have clearly defined responsibilities within the board such as the Audit Committee; and know how to read a balance sheet, profit and loss account, cash flow statements and financial ratios and have some knowledge of various company laws. This, of course, excludes those who are invited to join boards as experts in other fields such as science and technology. This brings one to remuneration of non-executive directors. At present, most non-executive directors receive a sitting fee which cannot exceed Rs.2,000 per meeting. The Working Group on the Companies Act has recommended that this limit should be raised to Rs.5,000. Although this is better than Rs.2,000, it is hardly sufficient to induce serious effort by the non-executive directors. Recommendation 5 To secure better effort from non-executive directors, companies should: Pay a commission over and above the sitting fees for the use of the professional inputs. The present commission of 1% of net profits (if the company has a managing director), or 3% (if there is no managing director) is sufficient. Consider offering stock options, so as to relate rewards to performance. Commissions are rewards on current profits. Stock options are rewards contingent upon future appreciation of corporate value. An appropriate mix of the two can align a non-executive director towards keeping an eye on short term profits as well as longer term shareholder value. The above recommendation can be easily achieved without the necessity of any formalized remuneration committee of the board. To ensure that non-executive directors properly discharge

their fiduciary obligations, it is, however, necessary to give a record of their attendance to the shareholders. Recommendation 6 While re-appointing members of the board, companies should give the attendance record of the concerned directors. If a director has not been present (absent with or without leave) for 50 percent or more meetings, then this should be explicitly stated in the resolution that is put to vote. As a general practice, one should not re-appoint any director who has not had the time attend even one half of the meetings. It is important to recognise that, under usual circumstances, non-executive directors in India suffer from lack of quality information. Simply put, the extent to which non-executive directors can play their role is determined by the quality of disclosures that are made by the management to the board. In the interest of good governance, certain key information must be placed before the board, and must form part of the agenda papers. Recommendation 7 Key information that must be reported to, and placed before, the board must contain: Annual operating plans and budgets, together with up-dated long term plans. Capital budgets, manpower and overhead budgets. Quarterly results for the company as a whole and its operating divisions or business segments. Internal audit reports, including cases of theft and dishonesty of a material nature. Show cause, demand and prosecution notices received from revenue authorities which are considered to be materially important. (Material nature is any exposure that exceeds 1 percent of the companys net worth). Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems. Default in payment of interest or non-payment of the principal on any public deposit, and/or to any secured creditor or financial institution. Defaults such as non-payment of inter-corporate deposits by or to the company, or materially substantial non-payment for goods sold by the company. Any issue which involves possible public or product liability claims of a substantial nature, including any judgement or order which may have either passed strictures on the conduct of the

company, or taken an adverse view regarding another enterprise that can have negative implications for the company. Details of any joint venture or collaboration agreement. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property. Recruitment and remuneration of senior officers just below the board level, including appointment or removal of the Chief Financial Officer and the Company Secretary. Labour problems and their proposed solutions. Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks of adverse exchange rate movement, if material. The Report of the Working Group on the Companies Act was in favour of Audit Committees, but recommended that these be set up voluntarily with the industry associations playing a catalytic role [p.23]. The Group felt that legislating in favour of Audit Committees would be counter-productive, and could lead to a situation where such committees would be often constituted to meet the letter and not the spiritof the law. Nevertheless, there is a clear need for Audit Committees, which yields the next recommendation. Recommendation 8 1. Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores should set up Audit Committees within two years. 2. Audit Committees should consist of at least three members, all drawn from a companys non-executive directors, who should have adequate knowledge of finance, accounts and basic elements of company law. 3. To be effective, the Audit Committees should have clearly defined Terms of Reference and its members must be willing to spend more time on the companys work vis--vis other nonexecutive directors. 4. Audit Committees should assist the board in fulfilling its functions relating to corporate accounting and reporting practices, financial and accounting controls, and financial statements and proposals that accompany the public issue of any securityand thus provide effective supervision of the financial reporting process.

5. Audit Committees should periodically interact with the statutory auditors and the internal auditors to ascertain the quality and veracity of the companys accounts as well as the capability of the auditors themselves. 6. For Audit Committees to discharge their fiduciary responsibilities with due diligence, it must be incumbent upon management to ensure that members of the committee have full access to financial data of the company, its subsidiary and associated companies, including data on contingent liabilities, debt exposure, current liabilities, loans and investments. 7. By the fiscal year 1998-99, listed companies satisfying criterion (1) should have in place a strong internal audit department, or an external auditor to do internal audits; without this, any Audit Committee will be toothless. Why should the management of most Indian companies bother about giving such information to their Audit Committees? The answer is straightforward. Over time, they will have to, for there will be a clear-cut signaling effect. Better companies will choose professional non-executive directors and form independent Audit Committees. Others will either have to follow suit, or get branded as the corporate laggards. Moreover, once there is an established correlation between Audit Committees on the one hand, and the quality of financial disclosure on the other, investors will vote with their feet. The last two years have seen domestic investors escape from equity in favour of debt, particularly bonds issued by public financial institutions. If the corporate sector wants to create a comeback for equity, it can only do so through greater transparency. Audit Committees ensure long term goodwill through such transparency. Desirable Disclosure Our corporate disclosure norms are inadequate. With the growth of the financial press and equity researchers, the days of having opaque accounting standards and disclosures are rapidly coming to an end. As a country which wishes to be a global player, we cannot hope to tap the GDR market with inadequate financial disclosures; it will not be credible to present one set of accounts to investors in New York and Washington DC, and a completely different one to the shareholders in Mumbai and Chennai. So, what is the minimum level of disclosure that Indian companies ought to be aiming for? The Working Group on the Companies Act have recommended many financial as well as nonfinancial disclosures. It is worth recapitulating the more important ones. Non-Financial disclosures recommended by the Working Group on the Companies Act

1. Comprehensive report on the relatives of directors either as employees or Board members to be an integral part of the Directors Report of all listed companies. 2. Companies have to maintain a register which discloses interests of directors in any contract or arrangement of the company. The existence of such a register and the fact that it is open for inspection by any shareholder of the company should be explicitly stated in the notice of the AGM of all listed companies. 3. Similarly, the existence of the directors shareholding register and the fact that it can be inspected by members in any AGM should be explicitly stated in the notice of the AGM of all listed companies. 4. Details of loans to directors should be disclosed as an annex to the Directors Report in addition to being a part of the schedules of the financial statements. Such loans should be limited to only three categorieshousing, medical assistance, and education for family membersand be available only to full time directors. The detailed terms of loan would need shareholders approval in a general meeting. 5. Appointment of sole selling agents for India will require prior approval of a special resolution in a general meeting of shareholders. The board may approve the appointment of sole selling agents in foreign markets, but the information must be divulged to shareholders as a part of the Directors Report accompanying the annual audited accounts. In either case, if the sole selling agent is related to any director or director having interest, this fact has to not only be stated in the special resolution but also divulged as a separate item in the Directors Report. 6. Subject to certain exceptions, there should be a Secretarial Compliance Certificate forming a part of the Annual Returns that is filed with the Registrar of Companies which would certify, in prescribed format, that the secretarial requirements under the Companies Act have been adhered to. Financial disclosures recommended by the Working Group on the Companies Act 1. A tabular form containing details of each directors remuneration and commission should form a part of the Directors Report, in addition to the usual practice of having it as a note to the profit and loss account. 2. Costs incurred, if any, in using the services of a Group Resource Company must be clearly and separately disclosed in the financial statement of the user company. 3. A listed company must give certain key information on its divisions or business segments as a part of the Directors Report in the Annual Report. This should encompass (i) the share in total

turnover, (ii) review of operations during the year in question, (iii) market conditions, and (iv) future prospects. For the present, the cut-off may be 10% of total turnover. 4. Where a company has raised funds from the public by issuing shares, debentures or other securities, it would have to give a separate statement showing the end-use of such funds, namely: how much was raised versus the stated and actual project cost; how much has been utilised in the project up to the end of the financial year; and where are the residual funds, if any, invested and in what form. This disclosure would be in the balance sheet of the company as a separate note forming a part of accounts. 5. The disclosure on debt exposure of the company should be strengthened. 6. In addition to the present level of disclosure on foreign exchange earnings and outflow, there should also be a note containing separate data on of foreign currency transactions that are germane in todays context: (i) foreign holding in the share capital of the company, and (ii) loans, debentures, or other securities raised by the company in foreign exchange. 7. The difference between financial statements pertaining to fixed assets and long term liabilities (including share capital and liabilities which are not to be liquidated within a year) as at the end of the financial year and the date on which the board approves the balance sheet and profit and loss account should be disclosed.. 8. If any fixed asset acquired through or given out on lease is not reported under appropriate subheads, then full disclosure would need to be made as a note to the balance sheet. This should give details of the type of asset, its total value, and the future obligations of the company under the lease agreement. 9. Any inappropriate treatment of an item in the balance sheet or profit and loss account should not be allowed to be explained away either through disclosure of accounting policies or via notes forming a part of accounts but should be dealt with in the Directors Report. While the disclosures recommended by the Working Group in its report as well as in the modified Schedule VI that would accompany the Draft Bill go far beyond existing levels, much more needs to be done outside the framework of law, particularly (i) a model of voluntary disclosure in the current context, and

(ii) consolidation of accounts. All other things being equal, greater the quality of disclosure, the more loyal are a companys shareholders. Besides, there is something very inequitable about of present disclosure standards: we have one norm for the foreigners when we go in for GDRs or private placement with foreign portfolio investors, and a very different one for our more loyal Indian shareholders. This should not continue. The suggestions given below partly rectify this imbalance. Recommendation 9 Under Additional Shareholders Information, listed companies should give data on: 1. High and low monthly averages of share prices in a major Stock Exchange where the company is listed for the reporting year. 2. Greater detail on business segments up to 10% of turnover, giving share in sales revenue, review of operations, analysis of markets and future prospects. The Working Group on the Companies Act has recommended that consolidation should be optional, not mandatory. There were two reasons: (i) first, that the Income Tax Department does not accept the concept of group accounts for tax purposes and the Report of the Working Group on the Income Tax Act does not suggest any difference, and (ii) the public sector term lending institutions do not allow leveraging on the basis of group assets. Thus: Recommendation 10 1. Consolidation of Group Accounts should be optional and subject to the FIs allowing companies to leverage on the basis of the groups assets, and the Income Tax Department using the group concept in assessing corporate income tax. 2. If a company chooses to voluntarily consolidate, it should not be necessary to annex the accounts of its subsidiary companies under section 212 of the Companies Act. 3. However, if a company consolidates, then the definition of group should include the parent company and its subsidiaries (where the reporting company owns over 50% of the voting stake). One of the most appealing features of the Cadbury Committee Report (Committee on the Financial Aspects of Corporate Governance) is the Compliance Certificate that has to accompany the annual reports of all companies listed in the London Stock Exchange. This alone has created a far more

healthy milieu for corporate governance despite the cosy, club-like atmosphere of British boardrooms. It is essential that a variant of this be adopted in India. Recommendation 11 Major Indian stock exchanges should gradually insist upon a compliance certificate, signed by the CEO and the CFO, which clearly states that: The management is responsible for the preparation, integrity and fair presentation of the financial statements and other information in the Annual Report, and which also suggest that the company will continue in business in the course of the following year. The accounting policies and principles conform to standard practice, and where they do not, full disclosure has been made of any material departures. The board has overseen the companys system of internal accounting and administrative controls systems either director or through its Audit Committee (for companies with a turnover of Rs.100 crores or paid-up capital of Rs.20 crores) As mentioned earlier, there is something inequitable about disclosure by a company substantially more for its GDR issue as compared to its domestic issue. This treats Indian shareholders as if they are children of a lesser God. Recommendation 12 For all companies with paid-up capital of Rs. 20 crores or more, the quality and quantity of disclosure that accompanies a GDR issue should be the norm for any domestic issue. Capital Market Issues Since take-over is immediately associated with raider, it is considered an unethical act of corporate hostility. The bulk of historical evidence shows otherwise. Growth of industry and business in most developed economies have been aided and accompanied by take-overs, mergers and strategic acquisitions. International data shows that take-overs usually serve three purposes: (i) creates economies of scale and scope, (ii) imposes a credible threat on management to perform for the shareholders, and (iii) enhances shareholder value in the short- and in the medium-term. Because the targets are typically underperforming companies, take-overs typically enhance short- as well as longer term shareholder value.

The short term value rises because the bidder has to offer shareholders a price that is significantly higher than the market. Longer term gains tend to occur because the buyer has not only bet on generating higher value through cost cutting, eliminating unproductive lines and strengthening productive ones but also put in his money to own the controlling block of equity.The new Take-over Code has been introduced in India. Although the code has its problems especially after a 50 percent acquisitionit is a step in the right direction. However, the code is, at best, necessary for facilitating take-overs; it is hardly sufficient. There lies the basic problem with take-overs in India. One cannot have a dynamic market and a level playing field for take-overs when there are multiple restrictions on financing such acquisitions. Banks do not lend for such activities. Until the slack season credit policy announced on 15 April 1997, banks had imposed a credit limit is Rs.10 lakhs against share collateralhardly the kind of money that can fund domestically financed take-overs. There is no securitisation. This prevents the value of underlying assets to be used in refinancing something which could not only reduce cost of funds but also facilitate take-overs by dynamic but not necessarily cash rich entrepreneurs. FIs do not finance take-overs. There are not enough corporate debt instruments which a company could use to finance a takeover and even these attract very high rates of Stamp Duty. In such an environment, it is not surprising that one ends up with a severely limited take-over code where an acquirer can go into take-over mode and, yet need not increase its equity exposure to more than 30 percent. Moreover, it queers the pitch in favour of those who have access to off-shore funds, which do not operate under these artificial constraints. As things stand, there will be only two types of raiders: (i) entrepreneurs from cash rich industries, and (ii) foreign investors who can garner substantial cheap funds from abroad. From a perspective of industrial growthwhere take-overs become vehicles for synergy, scale, new technological and managerial inputs, corporate dynamism, and long term enhancement of shareholder valueit is essential that dynamic Indian firms and entrepreneurial groups attempting take-overs be treated the same way by Indian banks and FIs as their buyout counterparts are in the west. This leads to an important recommendation.

Recommendation 13 Government must allow far greater funding to the corporate sector against the security of shares and other paper. When this is in place, the take-over code should be modified to reflect international norms. Once take-over finance is easily available to Indian entrepreneurs, the trigger should increase to 20%, and the minimum bid should reflect at least a 51% take-over. Creditors Rights It is a universal axiom that creditors have a prior and pre-committed claim on the income of the company, and that this claim has to be satisfied irrespective of the state of affairs of the company. Important creditors can, and do, demand periodic operational information to monitor the state of health of their debtor firms; but, so long as their dues are being repaid (and expected to be repaid) on schedule, pure creditors have no legal say in the running of a company. Therefore, insofar as creditors are not shareholders, and so long as their dues are being paid in time, they should desist from demanding a seat on the board of directors. This is an important point in the Indian context. Almost all term loans from FIs carry a covenant that it will represented on the board of the debtor company via a nominee director. This yields the next recommendation. Recommendation 14 It would be desirable for FIs as pure creditors to rewrite their covenants to eliminate having nominee directors except: a) in the event of serious and systematic debt default; and b) in case of the debtor company not providing six-monthly or quarterly operational data to the concerned FI(s). Today, credit-rating is compulsory for any corporate debt issue. But, as in the case of primary equity issues, the quality of information given to the Indian investing public is still well below what is disclosed in many other developed countries. Given below are some suggestions. Recommendation 15 1. If any company goes to more than one credit rating agency, then it must divulge in the prospectus and issue document the rating of all the agencies that did such an exercise.

2. It is not enough to state the ratings. These must be given in a tabular format that shows where the company stands relative to higher and lower ranking. It makes considerable difference to an investor to know whether the rating agency or agencies placed the company in the top slots, or in the middle, or in the bottom. 3. It is essential that we look at the quantity and quality of disclosures that accompany the issue of company bonds, debentures, and fixed deposits in the USA and Britainif only to learn what more can be done to inspire confidence and create an environment of transparency. 4. Finally, companies which are making foreign debt issues cannot have a two sets of disclosure norms: an exhaustive one for the foreigners, and a relatively minuscule one for Indian investors. There is another area of concern regarding creditors rights. This has to do with holders of company deposits. In the last three years, there have been too many instances where manufacturing as well as investment and finance companies have reneged on payment of interest on company deposits or repayment of the principal. Since these deposits are generally unsecured loans, the deposit holders are prime targets of default. Recommendation 16 Companies that default on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments until the default is made good; and declare dividends until the default is made good. Nutshell, therefore, while nominee directors of FIs ought to be far more powerful than the disinterested non-executive directors, they are in fact at par. Consequently, the institutions which could have played the most proactive role in corporate governance Indias largest concentrated shareholders-cum-debtholders have not done so. The long term solution requires questioning the very basis of majority government ownership of the FIs, and whether it augurs for better governance and higher shareholder value for Indias companies as well as the FIs themselves. As a rule, government institutions are not sufficiently concerned about adverse income and wealth consequences arising out of wrong decisions and inaction; their incentive structures do not reward performance and punish nonperformance; and, most of all, they remain highly susceptible to pulls and pressures from various ministries which have little to do with commercial accountability, and

which often destroy the bottomline. Therefore, it is necessary to debate whether the government should gradually become a minority shareholder in all its financial sector institutions. This debate needs to be thrown open to taxpayers and the investing public. But, for the present, there is a short term solution that must be considered as quickly as possible. Recommendation 17 Reduction in the number of companies where there are nominee directors. It has been argued by FIs that there are too many companies where they are on the board, and too few competent officers to do the task properly. So, in the first instance, FIs should take a policy decision to withdraw from boards of companies where their individual shareholding is 5 percent or less, or total FI holding is under 10 percent. CORPORATE GOVERNANCE CODE OF TATA GROUPS

Values and purpose Purpose At the Tata group we are committed to improving the quality of life of the communities we serve. We do this by striving for leadership and global competitiveness in the business sectors in which we operate. Our practice of returning to society what we earn evokes trust among consumers, employees, shareholders and the community. We are committed to protecting this heritage of leadership with trust through the manner in which we conduct our business.

Core values Tata has always been values-driven. These values continue to direct the growth and business of Tata companies. The five core Tata values underpinning the way we do business are:

Integrity: We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny. Understanding: We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve.

Excellence: We must constantly strive to achieve the highest possible standards in our dayto-day work and in the quality of the goods and services we provide. Unity: We must work cohesively with our colleagues across the group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation.

Responsibility: We must continue to be responsible, sensitive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.

Tata Code of Conduct This comprehensive document serves as the ethical road map for Tata employees and companies, and provides the guidelines by which the group conducts its businesses. Clause:1 National interest The Tata group is committed to benefit the economic development of the countries in which it operates. No Tata company shall undertake any project or activity to the detriment of the wider interests of the communities in which it operates. A Tata companys management practices and business conduct shall benefit the country, localities and communities in which it operates, to the extent possible and affordable, and shall be in accordance with the laws of the land.

A Tata company, in the course of its business activities, shall respect the culture, customs and traditions of each country and region in which it operates. It shall conform to trade procedures, including licensing, documentation and other necessary formalities, as applicable. Clause:2 Financial reporting and records A Tata company shall prepare and maintain its accounts fairly and accurately and in accordance with the accounting and financial reporting standards which represent the generally accepted guidelines, principles, standards, laws and regulations of the country in which the company conducts its business affairs. Internal accounting and audit procedures shall reflect, fairly and accurately, all of the companys business transactions and disposition of assets, and shall have internal controls to provide assurance to the companys board and shareholders that the transactions are accurate and legitimate. All required information shall be accessible to company auditors and other authorised parties and government agencies.There shall be no willful omissions of any company transactions from the books and records, no advance-income recognition and no hidden bank account and funds. Any willful, material misrepresentation of and / or misinformation on the financial accounts and reports shall be regarded as a violation of the Code, apart from inviting appropriate civil or criminal action under the relevant laws. No employee shall make, authorise, abet or collude in an improper payment, unlawful commission or bribing. Clause:3 Competition A Tata company shall fully support the development and operation of competitive open markets and shall promote the liberalisation of trade and investment in each country and market in which it operates. Specifically, no Tata company or employee shall engage in restrictive trade practices, abuse of market dominance or similar unfair trade activities. A Tata company or employee shall market the companys products and services on their own merits and shall not make unfair and misleading statements about competitors products and

services. Any collection of competitive information shall be made only in the normal course of business and shall be obtained only through legally permitted sources and means. Clause:4 Equal opportunities employer A Tata company shall provide equal opportunities to all its employees and all qualified applicants for employment without regard to their race, caste, religion, colour, ancestry, marital status, gender, sexual orientation, age, nationality, ethnic origin or disability. Human resource policies shall promote diversity and equality in the workplace, as well as compliance with all local labour laws, while encouraging the adoption of international best practices. Employees of a Tata company shall be treated with dignity and in accordance with the Tata policy of maintaining a work environment free of all forms of harassment, whether physical, verbal or psychological. Employee policies and practices shall be administered in a manner consistent with applicable laws and other provisions of this Code, respect for the right to privacy and the right to be heard, and that in all matters equal opportunity is provided to those eligible and decisions are based on merit. Clause:5 Gifts and donations A Tata company and its employees shall neither receive nor offer or make, directly or indirectly, any illegal payments, remuneration, gifts, donations or comparable benefits that are intended, or perceived, to obtain uncompetitive favours for the conduct of its business. The company shall cooperate with governmental authorities in efforts to eliminate all forms of bribery, fraud and corruption. However, a Tata company and its employees may, with full disclosure, accept and offer nominal gifts, provided such gifts are customarily given and / or are of a commemorative nature. Each company shall have a policy to clarify its rules and regulations on gifts and entertainment, to be used for the guidance of its employees.

Clause:6 Government agencies A Tata company and its employees shall not, unless mandated under applicable laws, offer or give any company funds or property as donation to any government agency or its representative, directly or through intermediaries, in order to obtain any favourable performance of official duties. A Tata company shall comply with government procurement regulations and shall be transparent in all its dealings with government agencies. Clause:7 Political non-alignment A Tata company shall be committed to and support the constitution and governance systems of the country in which it operates. A Tata company shall not support any specific political party or candidate for political office. The companys conduct shall preclude any activity that could be interpreted as mutual dependence / favour with any political body or person, and shall not offer or give any company funds or property as donations to any political party, candidate or campaign. Clause:8 Health, safety and environment A Tata company shall strive to provide a safe, healthy, clean and ergonomic working environment for its people. It shall prevent the wasteful use of natural resources and be committed to improving the environment, particularly with regard to the emission of greenhouse gases, and shall endeavour to offset the effect of climate change in all spheres of its activities. A Tata company, in the process of production and sale of its products and services, shall strive for economic, social and environmental sustainability. Clause:9 Quality of products and services A Tata company shall be committed to supply goods and services of world class quality standards, backed by after-sales services consistent with the requirements of its customers, while striving for

their total satisfaction. The quality standards of the companys goods and services shall meet applicable national and international standards. A Tata company shall display adequate health and safety labels, caveats and other necessary information on its product packaging. Clause:10 Corporate citizenship A Tata company shall be committed to good corporate citizenship, not only in the compliance of all relevant laws and regulations but also by actively assisting in the improvement of quality of life of the people in the communities in which it operates. The company shall encourage volunteering by its employees and collaboration with community groups. Tata companies are also encouraged to develop systematic processes and conduct management reviews, as stated in the Tata corporate sustainability protocol, from time to time so as to set strategic direction for social development activity. The company shall not treat these activities as optional, but should strive to incorporate them as an integral part of its business plan. Clause:11 Cooperation of Tata companies A Tata company shall cooperate with other Tata companies including applicable joint ventures, by sharing knowledge and physical, human and management resources, and by making efforts to resolve disputes amicably, as long as this does not adversely affect its business interests and shareholder value. In the procurement of products and services, a Tata company shall give preference to other Tata companies, as long as they can provide these on competitive terms relative to third parties. Clause:12 Public representation of the company and the group The Tata group honours the information requirements of the public and its stakeholders. In all its

public appearances, with respect to disclosing company and business information to public constituencies such as the media, the financial community, employees, shareholders, agents, franchisees, dealers, distributors and importers, a Tata company or the Tata group shall be represented only by specifically authorised directors and employees. It shall be the sole responsibility of these authorised representatives to disclose information about the company or the group. Clause:1 3 Third party representation Parties which have business dealings with the Tata group but are not members of the group, such as consultants, agents, sales representatives, distributors, channel partners, contractors and suppliers, shall not be authorised to represent a Tata company without the written permission of the Tata company, and / or if their business conduct and ethics are known to be inconsistent with the Code. Third parties and their employees are expected to abide by the Code in their interaction with, and on behalf of, a Tata company. Tata companies are encouraged to sign a non-disclosure agreement with third parties to support confidentiality of information. Clause: 14 Use of the Tata brand The use of the Tata name and trademark shall be governed by manuals, codes and agreements to be issued by Tata Sons. The use of the Tata brand is defined in and regulated by the Tata Brand Equity and Business Promotion agreement. No third party or joint venture shall use the Tata brand to further its interests without specific authorisation. Clause:15 Group policies A Tata company shall recommend to its board of directors the adoption of policies and guidelines periodically formulated by Tata Sons. Clause:16 Shareholders

A Tata company shall be committed to enhancing shareholder value and complying with all regulations and laws that govern shareholder rights.The board of directors of a Tata company shall duly and fairly inform its shareholders about all relevant aspects of the companys business, and disclose such information in accordance with relevant regulations and agreements. Clause:17 Ethical conduct Every employee of a Tata company, including full-time directors and the chief executive, shall exhibit culturally appropriate deportment in the countries they operate in, and deal on behalf of the company with professionalism, honesty and integrity, while conforming to high moral and ethical standards. Such conduct shall be fair and transparent and be perceived to be so by third parties. Every employee of a Tata company shall preserve the human rights of every individual and the community, and shall strive to honour commitments. Every employee shall be responsible for the implementation of and compliance with the Code in his / her environment. Failure to adhere to the Code could attract severe consequences, including termination of employment. Clause:18 Regulatory compliance Employees of a Tata company, in their business conduct, shall comply with all applicable laws and regulations, in letter and spirit, in all the territories in which they operate. If the ethical and professional standards of applicable laws and regulations are below that of the Code, then the standards of the Code shall prevail. Directors of a Tata company shall comply with applicable laws and regulations of all the relevant regulatory and other authorities. As good governance practice they shall safeguard the confidentiality of all information received by them by virtue of their position. Clause:19 Concurrent employment Consistent with applicable laws, an employee of a Tata company shall not, without the requisite,

officially written approval of the company, accept employment or a position of responsibility (such as a consultant or a director) with any other company, nor provide freelance services to anyone, with or without remuneration. In the case of a full-time director or the chief executive, such approval must be obtained from the board of directors of the company. Clause:20 Conflict of interest An employee or director of a Tata company shall always act in the interest of the company, and ensure that any business or personal association which he / she may have does not involve a conflict of interest with the operations of the company and his / her role therein. An employee, including the executive director (other than independent director) of a Tata company, shall not accept a position of responsibility in any other non-Tata company or not-for-profit organisation without specific sanction. The above shall not apply to (whether for remuneration or otherwise): a) Nominations to the boards of Tata companies, joint ventures or associate companies. b) Memberships / positions of responsibility in educational / professional bodies, wherein such association will benefit the employee / Tata company. c) Nominations / memberships in government committees / bodies or organisations. d) Exceptional circumstances, as determined by the competent authority. Competent authority, in the case of all employees, shall be the chief executive, who in turn shall report such exceptional cases to the board of directors on a quarterly basis. In case of the chief executive and executive directors, the Group Corporate Centre shall be the competent authority. An employee or a director of a Tata company shall not engage in any business, relationship or activity which might conflict with the interest of his / her company or the Tata group. A conflict of interest, actual or potential, may arise where, directly or indirectly a) An employee of a Tata company engages in a business, relationship or activity with anyone who is party to a transaction with his / her company. b) An employee is in a position to derive an improper benefit, personally or to any of his / her

relatives, by making or influencing decisions relating to any transaction. c) An independent judgement of the companys or groups best interest cannot be exercised. The main areas of such actual or potential conflicts of interest shall include the following: a) An employee or a full-time director of a Tata company conducting business on behalf of his / her company or being in a position to influence a decision with regard to his / her companys business with a supplier or customer where his / her relative is a principal officer or representative, resulting in a benefit to him / her or his / her relative. b) Award of benefits such as increase in salary or other remuneration, posting, promotion or recruitment of a relative of an employee of a Tata company, where such an individual is in a position to influence decisions with regard to such benefits. c) The interest of the company or the group can be compromised or defeated. Notwithstanding such or any other instance of conflict of interest that exist due to historical reasons, adequate and full disclosure by interested employees shall be made to the companys management. It is also incumbent upon every employee to make a full disclosure of any interest which the employee or the employees immediate family, including parents, spouse and children, may have in a family business or a company or firm that is a competitor, supplier, customer or distributor of or has other business dealings with his / her company. Upon a decision being taken in the matter, the employee concerned shall be required to take necessary action, as advised, to resolve / avoid the conflict. If an employee fails to make the required disclosure and the management of its own accord becomes aware of an instance of conflict of interest that ought to have been disclosed by the employee, the management shall take a serious view of the matter and consider suitable disciplinary action against the employee. Clause:21 Securities transactions and confidential information An employee of a Tata company and his / her immediate family shall not derive any benefit or counsel, or assist others to derive any benefit, from access to and possession of information about

the company or group or its clients or suppliers that is not in the public domain and, thus, constitutes unpublished, price-sensitive insider information. An employee of a Tata company shall not use or proliferate information that is not available to the investing public, and which therefore constitutes insider information, for making or giving advice on investment decisions about the securities of the respective Tata company, group, client or supplier on which such insider information has been obtained. Such insider information might include (without limitation) the following:

Acquisition and divestiture of businesses or business units. Financial information such as profits, earnings and dividends. Announcement of new product introductions or developments. Asset revaluations. Investment decisions / plans. Restructuring plans. Major supply and delivery agreements. Raising of finances.

An employee of a Tata company shall also respect and observe the confidentiality of information pertaining to other companies, their patents, intellectual property rights, trademarks and inventions; and strictly observe a practice of non-disclosure. Clause: 22 Protecting company assets The assets of a Tata company shall not be misused; they shall be employed primarily and judiciously for the purpose of conducting the business for which they are duly authorised. These include tangible assets such as equipment and machinery, systems, facilities, materials and resources, as well as intangible assets such as information technology and systems, proprietary information, intellectual property, and relationships with customers and suppliers. Clause:23 Citizenship

The involvement of a Tata employee in civic or public affairs shall be with express approval from the chief executive of his / her company, subject to this involvement having no adverse impact on the business affairs of the company or the Tata group. Clause: 24 Integrity of data furnished Every employee of a Tata company shall ensure, at all times, the integrity of data or information furnished by him/her to the company. He/she shall be entirely responsible in ensuring that the confidentiality of all data is retained and in no circumstance transferred to any outside person/party in the course of normal operations without express guidelines from or, the approval of the management. Clause: 25 Reporting concerns Every employee of a Tata company shall promptly report to the management, and / or third-party ethics helpline, when she / he becomes aware of any actual or possible violation of the Code or an event of misconduct, act of misdemeanor or act not in the companys interest. Such reporting shall be made available to suppliers and partners, too. Any Tata employee can choose to make a protected disclosure under the whistleblower policy of the company, providing for reporting to the chairperson of the audit committee or the board of directors or specified authority. Such a protected disclosure shall be forwarded, when there is reasonable evidence to conclude that a violation is possible or has taken place, with a covering letter, which shall bear the identity of the whistleblower. The company shall ensure protection to the whistleblower and any attempts to intimidate him / her would be treated as a violation of the Code. Business excellence by following code of conduct:

Business excellence has been embedded in Tata through processes and methodologies that enable companies to heed the call of quality

The quality movement in the Tata group is defined by a framework known as the Tata Business Excellence Model (TBEM), which has been adapted from the renowned Malcolm Baldrige archetype. The model works under the aegis of Tata Quality Management Services (TQMS), an inhouse organisation mandated to help different Tata companies achieve their business objectives through specific processes. These processes which have come to characterise the Tata way of enhancing and conducting its business endeavours essentially relate to two factors: business excellence and business ethics. TQMS plays the role of supporter and facilitator in the journey that Tata enterprises undertake to reach the peaks of business eminence while, at the same time, adhering to the highest ethical standards. There are, primarily, two tools that define the pathways and scope of this journey. The first of these is TBEM and the other is the Tata Code of Conduct. While quality has always been one of the cornerstones of the Tata way of business, the need to introduce a formal system that calibrated how different group companies were faring on this scale began being felt in the early 1990s. That led to the institution, in 1995, of the JRD Quality Value Awards, the forerunner to TBEM. Named after JRD Tata, the late chairman of the group and a crusader for the cause of business excellence in Tata companies, the awards have now been incorporated in TBEM. There is a formal arrangement that governs the relationship between individual Tata companies and the superstructure that is the Tata group. In order to use the Tata nomenclature, a group company has to sign a contract called the Brand Equity and Business Promotion (BEBP) Agreement. This places an obligation on the company signing on to adopt TBEM as a means to attaining business leadership. Tata Sponge Iron Limited- achievements: Tata Sponge Iron Limited is the first Indian sponge iron plant to adopt an indigenous mechanism for direct reduction technology. It also stands out as the first sponge iron plant in India to receive the ISO-9002 and the ISO-14000 certifications. Apart from these achievements, Tata Sponge has

bagged various awards on corporate governance, quality, safety and environment. Some of the distinct ones are as follows:

Tata Sponge featured as one of the top 25 companies short listed and honoured for "Excellence in Corporate Governance" in 2002-03 and again consecutively for the years 2004 & 2005 by the Institute of Company Secretaries of India.

Won the Golden Peacock Winners Award for Corporate Social Responsibility for the year 2005.

CONCLUSION: Companies that sign the BEBP agreement are obliged to abide by the Tata code of conduct, a set of principles that guides and governs the way a Tata enterprise runs its business. The agreement also enjoins the group to follow practices that enhance the Tata brand, and invest in building the Tata brand equity. BEBP signatories can access established group capabilities in areas such as strategic management and human resources.